We study optimal income taxation and public debt policy in a neoclassical economy pop-
ulated by infinitely-lived households and a benevolent government. The government makes
sequential decisions on the provision of a valued public good, on income taxation and the
issue of public debt. We characterize and compute Markov-perfect optimal fiscal policy in
this economy with two payoff-relevant state variables: physical capital and public debt. We
find two stable, steady-state equilibria: one with no income taxation and positive government
asset holdings, and another with positive taxation and public debt issuances. We prove that
the two steady states are associated with different policy rules, which implies a multiplicity
of (expectation-driven) Markov-perfect equilibria.